Bertrand Competition in Markets with Network Effects and Switching Costs

We analyze market dynamics under Bertrand duopoly competition in industries with network effects and consumer switching costs. Consumers form installed bases, repeatedly buy the products, and differ with respect to their switching costs. Depending on the ratio of switching costs to network effects, our model generates convergence to monopoly as well as market sharing as equilibrium outcomes. Convergence can be monotone or alternating in both scenarios. A critical mass effect, where consumers are trapped into one technology for sure only occurs for intermediate values of switching costs, whereas for large switching costs market sharing is the unique equilibrium and for small switching costs both monopoly and market sharing equilibria emerge. We also analyze stationary and stable equilibria, where we show that a monopoly outcome is almost inevitable, if switching costs or network effects increase over time. Finally, we examine firms' incentives to make their products compatible and to create additional switching costs.Network effects, switching costs, Bertrand competition, market dynamics

Software for the Computation of Markov-Perfect Equilibria in a Dynamic Game of Store Location by Multi-Store Firms

This document is a supplement of the paper "Dynamic Spatial Competition Between Multi-Store Firms" by Aguirregabiria and Vicentini (2007). It describes in detail the library of programs and procedures, in GAUSS language, that is used in that paper. The program computes an equilibrium of a dynamic game of store location and spatial competition by multi-store firms. The equilibrium of the game is a space-time stochastic process for the network of stores of each firm as well as for prices, markups, profits and consumer welfare at every location in the geographic market. We illustrate the use of the program with an example.Dynamic Spatial competition; Store location; Market dynamics; Sunk costs

Network Effects and Switching Costs in the US Wireless Industry

I develop an empirical framework to disentangle different sources of consumer inertia in the US wireless industry. The use of a detailed data set allows me to identify preference heterogeneity from consumer type-specific market shares and switching costs from churn rates. Identification of a localized network effect comes from comparing the dynamics of distinct local markets. The central condition for identification is that neither the characteristics defining consumer heterogeneity nor the characteristics defining reference groups are a (weak) subset of the other. Being able to separate switching costs and network effects is important as both can lead to inefficient consumer inertia, but depending on its sources policy implications may be very different. Estimates of switching costs range from US-$316 to US-$ 630. The willingness to pay for a 20%-point increase in an operator’s market share is on average US-$ 22 per month. My counterfactuals illustrate that both effects are important determinants of consumers’ price elasticities potentially translating into market power that helps large carriers in defending their dominant position

Immigration blues: understanding market dynamics through consumer acculturation

Several studies on market dynamics emphasize the role of consumers and other market actors in shaping the existing market logics. However, little attention has been paid to how immigrant consumer communities navigate among market actors and the mainstream institutional environment to alter markets in host societies. Through an acculturation lens, we set out to study the development of immigrant grocery shops in Norway. The findings reveal how the market formation is influenced by “immigration blues” through the challenges of acculturation, institutional constraints, and the role of the immigrant community as a network that is used to cope with the various challenges. We argue that many dynamics can be traced back to the confrontation between a neoliberal “everything can be negotiated” logic and the “statist individualistic” society within which the entrepreneurial activity takes place.publishedVersio

B2C E-Commerce Platform Competition Strategy Research Based on the Network Externality

In recent years, the competition between B2C e-commerce platforms is increasing. From the perspective of consumer choice, with the application of system dynamics theory, and the analysis of the Causal relationship between the direct network externalities, indirect network externalities, compatibility and so on, the paper established system flow chart and system dynamics model of B2C e-commerce platform competition. Then using Vensim PLE to simulate the model and verified the effectiveness and application value of the model. The results showed that cost strategy that reduced cost of consumers’ online shopping and passed on part of the costs to the sellers, the marketing strategy that improved the marketing costs and perfected the products and services and the compatibility strategy that improved the compatibility with market leadership platform can effectively increase the market share of B2C e-commerce platform

Complexity and complicity in mobile telecommunications : the effect of network externalities and isomorphic strategy

The new information economy acts as a microcosm where the dynamics of complexity are present through the pervasive effects of increasing returns. Network externalities are the ubiquitous force behind winner-takes-all scenarios where only the strongest firms survive. The effect is evident in cases such as Microsoft's quasi-monopoly and eBay's dominance of the consumer and small business auctions market. Interestingly however, many important industries exhibiting strong network externalities, have emerged with no dominant winner and the competitive environment is preserved. This empirical study of the UK mobile telecom industry, which tracks an 18-year history of the mobile network operators as well as the strategies and product diffusion patterns of the networks, found firms counteracting winner-takes-all forces. Results indicate the presence of complex adaptive behavior between competing firms. Strategies are reconfigured to ensure the collective survival of all operators in the industry. The probability that one firm will dominate and that the rest will fail is eliminated. A complex set of isomorphic strategies emerges at the levels of network platforms, technical standards and consumer platforms. Through strategic herding, network externalities are exploited to act for the benefit of the whole industry causing competitors' market shares to converge dramatically to equal levels.peer-reviewe

On Positional Consumption and Technological Innovation- an Agent-based Approach

Positional behavior is a source of externalities and sets limits to wellbeing. Remedies against this market failure are defended by some authors and rejected by others, while the core of the discussion rests on the benefits and costs of applying economic instruments. One of the issues discussed is the role that the competition for positional goods may have in generating technological innovation. This paper aims to contribute to the understanding of this process by analyzing an agent-based model. We observe a plausible structure of the dynamics behind the process of generation of technological innovation by positional consumption and obtain results on the influence of some key factors on the pace of innovation, particularly those of income inequality, the Hirsch conjecture of relative increase of positional consumption with affluence, and consumer network and social neighborhood sizes.Positional consumption, innovation, agent-based models, Robert Frank

Optimizing customer service network in consumer services

Tämä diplomityö keskittyy taloudellisesti kannattavimman palvelupisteverkoston löytämiseen kuluttajaliiketoiminnassa. Työ on tehty pakettiliiketoimintaa harjoittavalle logistiikkayritykselle ja sen fokus on verkkokauppojen kuluttajille lähettämissä paketeissa. Menetelmänä työssä käytetään systeemidynamiikkaa. Kirjallisuustutkimuksessa tarkastellaan systeemidynamiikan eroja muihin mallinnus- ja analyysimenetelmiin. Menetelmän avulla rakennettiin matemaattinen, pakettimarkkinaa kuvaava simulaatiomalli. Tutkittava ongelma voidaan jakaa kolmeen osaan: 1. Pakettimarkkinan käytöstä ohjaavien päätössääntöjen löytäminen ja todentaminen, 2. matemaattisen mallin rakentaminen löydettyjen päätössääntöjen pohjalta ja 3. mallin hyödyntäminen palvelupisteverkoston optimointiongelman ratkaisemiseksi. Mallia hyödynnettiin taloudellisesti optimaalisen palvelupisteverkoston tiheyden ja laadun etsimisessä. Menetelmän voidaan katsoa soveltuneen hyvin haasteen ratkaisemiseen. Lopputuloksena asiakkaalle toimitettiin uusi työkalu, jolla pystyttiin arvioimaan palvelupisteverkoston muutosten vaikutuksia taloudelliseen tulokseen, pakettivolyymeihin ja markkinaosuuteen. Työkalua hyödyntämällä löydetty optimaalinen palvelupisteverkosto vaikutti parhaimmillaan tuottavan noin 10% taloudellisen parannuksen alkuperäiseen verkostoon nähden.This thesis focuses on finding the economically most viable service point network in consumer business. The work has been done to a logistics company, and its focus is on the parcel market generated by online shopping. The method used in the research and modelling is system dynamics. The literature study examines the differences of system dynamics and other analytical methods. In order to solve the research problem, a mathematical simulation model that describes the parcel market was built. The research problem could be divided into three parts: 1. Finding and validating the decision making rules that produce the observed behavior in the market, 2. building a mathematical model based on the decision making rules and 3. utilizing the model to solve the service point network optimization problem. The model was then utilized in the search for economically optimal service point network density and quality. The system dynamics method could be considered well suited for this challenge. As a final result, a new tool was presented to the client with which it was possible to assess the impact of changes in service point network to the company’s financial performance, package volumes and market share. According to the model, the found optimal service point network produced a 10% increase in company’s economical result in comparison with the original network

Bipartite Producer-Consumer Networks and the Size Distribution of Firms

A bipartite producer-consumer network is constructed to describe the industrial structure. The edges from consumer to producer represent the choices of the consumer for the final products and the degree of producer can represent its market share. So the size distribution of firms can be characterized by producer's degree distribution. The probability for a producer receiving a new consumption is determined by its competency described by initial attractiveness and the self-reinforcing mechanism in the competition described by preferential attachment. The cases with constant total consumption and with growing market are studied. The following results are obtained: 1, Without market growth and a uniform initial attractiveness $a$, the final distribution of firm sizes is Gamma distribution for $a>1$ and is exponential for $a=1$. If $a<1$, the distribution is power in small size and exponential in upper tail; 2, For a growing market, the size distribution of firms obeys the power law. The exponent is affected by the market growth and the initial attractiveness of the firms.Comment: 13 pages, 3 figure